AUD/JPY softens to below 97.00 as China's manufacturing activity shrinks
- AUD/JPY weakens to around 96.80 in Friday’s early European session.
- China's manufacturing activity shrank in July, weighing on the China-proxy Aussie.
- BoJ’s dovish tone and political uncertainty in Japan might cap the downside for the cross.
The AUD/JPY cross posts modest losses near 96.80 during the early European session on Friday. The downbeat Chinese economic data undermines the China-proxy Australian Dollar (AUD). China’s July Caixin Services Purchasing Managers Index (PMI) report will be released next week.
China's manufacturing activity fell in July, as a slowing of new business growth led manufacturers to scale back production. China's Caixin Manufacturing PMI eased to 49.5 in July from 50.4 in June. This figure came in below the market forecast of 50.3. The 50-mark separates growth from contraction.
Furthermore, trade tensions are back in the headlines as a senior US official noted that there is no final decision on trade with China. US Treasury Secretary Scott Bessent said that the US and China will continue talks over maintaining a tariff truce before the deadline in two weeks, and Trump will make the final decision on any extension. Tariff uncertainty is likely to weigh on the China-proxy Aussie, as China is a major trading partner of Australia.
On the other hand, the dovish tone of the Bank of Japan (BoJ) might drag the JPY lower and cap the downside for the cross. BoJ Governor Kazuo Ueda signaled that the Japanese central bank needs more time to decipher the impact of US tariffs on the economy, inflation, and wages. The expectation that the BoJ could delay rate hikes for a bit longer following the ruling Liberal Democratic Party’s loss in the July 20 polls might also contribute to the JPY’s downside.
Australian Dollar FAQs
One of the most significant factors for the Australian Dollar (AUD) is the level of interest rates set by the Reserve Bank of Australia (RBA). Because Australia is a resource-rich country another key driver is the price of its biggest export, Iron Ore. The health of the Chinese economy, its largest trading partner, is a factor, as well as inflation in Australia, its growth rate and Trade Balance. Market sentiment – whether investors are taking on more risky assets (risk-on) or seeking safe-havens (risk-off) – is also a factor, with risk-on positive for AUD.
The Reserve Bank of Australia (RBA) influences the Australian Dollar (AUD) by setting the level of interest rates that Australian banks can lend to each other. This influences the level of interest rates in the economy as a whole. The main goal of the RBA is to maintain a stable inflation rate of 2-3% by adjusting interest rates up or down. Relatively high interest rates compared to other major central banks support the AUD, and the opposite for relatively low. The RBA can also use quantitative easing and tightening to influence credit conditions, with the former AUD-negative and the latter AUD-positive.
China is Australia’s largest trading partner so the health of the Chinese economy is a major influence on the value of the Australian Dollar (AUD). When the Chinese economy is doing well it purchases more raw materials, goods and services from Australia, lifting demand for the AUD, and pushing up its value. The opposite is the case when the Chinese economy is not growing as fast as expected. Positive or negative surprises in Chinese growth data, therefore, often have a direct impact on the Australian Dollar and its pairs.
Iron Ore is Australia’s largest export, accounting for $118 billion a year according to data from 2021, with China as its primary destination. The price of Iron Ore, therefore, can be a driver of the Australian Dollar. Generally, if the price of Iron Ore rises, AUD also goes up, as aggregate demand for the currency increases. The opposite is the case if the price of Iron Ore falls. Higher Iron Ore prices also tend to result in a greater likelihood of a positive Trade Balance for Australia, which is also positive of the AUD.
The Trade Balance, which is the difference between what a country earns from its exports versus what it pays for its imports, is another factor that can influence the value of the Australian Dollar. If Australia produces highly sought after exports, then its currency will gain in value purely from the surplus demand created from foreign buyers seeking to purchase its exports versus what it spends to purchase imports. Therefore, a positive net Trade Balance strengthens the AUD, with the opposite effect if the Trade Balance is negative.
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